IFIS for the first quarter of 2020: Tightening of financial conditions

Financial conditions tightened in the first quarter of 2020, after an easing trend in financial conditions was present throughout 2019. The tightening of financial conditions started in February 2020 and gained momentum during March due to the outbreak and spreading of the COVID-19 pandemic. Although the tightening of financial conditions is a result of domestic and foreign factor movements, it should be noted that the tightening of the foreign component was more pronounced. Compared to the last quarter of 2019, there were no significant changes in interest rates on loans and deposits on the domestic market. At the same time, the traditionally high level of liquidity of the domestic financial system was maintained. The Croatian National Bank introduced a number of monetary policy measures at the end of the first quarter aimed at preserving exchange rate stability and favorable financing conditions. However, the domestic capital market registered a negative reaction to the uncertainty caused by the pandemic. The first quarter of 2020 recorded a significant tightening of foreign financial conditions due to the shock caused by the COVID-19 pandemic. Thus, February and March brought a sudden and strong tightening of foreign financial conditions, after the entire year of 2019 was marked by eased foreign financial conditions. The worsened foreign financial conditions in the first quarter of 2020 were significantly influenced by the exceptional rise in volatility on world trade markets, coupled with disinvestments and low liquidity. The tightening of financial conditions tracked by the foreign component of the index was also caused by a considerable rise in credit default swaps of parent banks, as a result of the health and economic crisis in Italy caused by the pandemic. In addition to the challenges inherited from last year, such as geopolitical tensions and slowed growth, the consequences of the outbreak and spreading of COVID-19 are expected to have a continued significant impact on global financial conditions in 2020.

What is IFIS? 

IFIS is a monthly financial conditions index developed by the Institute of Economics, Zagreb. It provides timely information on the average financial conditions in the economy which can serve as a significant determinant of projections and, consequently, of future economic activity. Financial conditions estimates can be useful for economic activity projections, macroeconomic policy evaluation and financial investment decisions.    

How is IFIS calculated?

Overall financial conditions are influenced by a number of variables. The variables are selected so as to reflect changes in the local and international financial environment, taking into consideration the specific features of the local market. To be able to estimate the developments in financial conditions based on the large clusters of variables, it is necessary to extract data from various parts of the financial system into a simple and easily understandable index. The IFIS index is calculated as the pondered average of variables that represent the fluctuations in the financial system, using the frequently applied method of principal components analysis. IFIS is standardized so that its arithmetic mean equals zero (which is the average index value in the entire observed period), while the standard deviation equals one. Positive values represent harsher financial conditions than the average, and negative ones represent milder financial conditions compared to the average. An increase in the index indicates harshening financial conditions, while a decrease indicates milder financial conditions.

The development of the IFIS index was supported by the EIZ Club, Agrokor, Atlantic and Privredna banka Zagreb.

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